IASB Reveals Proposed Accounting Rules for Insurers

Crafting accounting standards is an inherently complicated undertaking.  As part of a larger convergence effort, both the London-based International Accounting Standards Board (IASB) and the Norwalk, Conn.-based Financial Accounting Standards Board (FASB) are working on improvements on the accounting for insurance contracts.

The goal is to provide greater transparency and more relevant information about an insurer’s financial position and financial performance. The IASB recently released an exposure draft detailing its proposed changes and the FASB is expected to follow with their own recommendations later this month.

“A fundamental review of insurance accounting was long overdue, with current practice resulting in financial information that is impenetrable to all but the most expert of users,” Sir David Tweedie, chairman of the IASB, said in a statement. “The publication of this exposure draft marks an important milestone in this review process. The proposed standard better reflects the economics of insurance contracts, and would result in more relevant, understandable and comparable information being available to investors.”

Douglas Barnert, executive director of the Group of North American Insurance Enterprises (GNAIE), says many issues remaine unresolved. One broad schism is between the “transfer model” approach of valuing contracts favored by the IASB versus the traditional “contract fulfillment” approach favored by FASB and GNAIE. Barnert says the transfer model approach is too complicated and overly reliant on hypothetical scenarios. “The industry prefers a revenue recognition approach as opposed to transfer approach because it’s an additional set of calculations that create less reliability in the valuations,” Barnert tells Insurance Networking News.

Another sticking point is the IASB’s preference for a unified model for all insurance contracts. Conversely, FASB contends that due to their shorter durations, non-life contracts are different and therefore require a different accounting approach. Add in the pressure felt by European insurers to get a unified risk-margin standard in place ahead of the adoption of European Union’s pending Solvency II standards, and the situation becomes even more complex.

Though the IASB is aiming for adoption by June 2011, Barnert notes that deadlines for accounting standards are notoriously malleable for good reason. He says the accounting boards should only stop working on the standards when they are able to fulfill their intended purpose. “When this becomes a high-quality, robust standard that going to be around for 20 years, that’s when you stop working on it,” he says. “We’re not going to be happy with an artificial deadline.”

Indeed, Barnert says crafting standards that accurately reflect a company’s operations is of the utmost importance, adding that an ill-fitting standard will force insurers to rely on supplemental filings, largely negating the entire point of standards and convergence. “We worry that we’ll be given an accounting standard that doesn’t reflect the way we’ve done business over last reporting period.”